Principal vs. Agent
The principal versus agent assessment determines whether a company presents revenue gross (as principal) or net (as agent) when another party is involved in providing goods or services to the customer.
Revenue Recognition
Explanation
A company is a principal if it controls the specified good or service before it is transferred to the customer. It then recognizes the full amount of consideration as revenue. A company is an agent if its role is to arrange for another party to provide the good or service. It then recognizes only its fee or commission.
Indicators of control include:
• primary responsibility for fulfilling the promise,
• inventory risk before or after transfer,
• discretion in establishing the price.
The assessment is made for each specified good or service, not for the contract as a whole.
Why It Matters
The assessment affects reported revenue – sometimes significantly – without changing profit. It is relevant for resellers, marketplaces, platforms, and companies bundling third-party products or services. In its post-implementation review of IFRS 15, the IASB classified the assessment of control over services and intangible assets in principal versus agent determinations as a low-priority matter to be considered in its next agenda consultation.
Related Terms
IFRS 15 · ASC 606 · Performance Obligation · Transaction Price · Drop Shipment
Related Articles
• The 5-Step Model of IFRS 15 / ASC 606 Explained for SAP Teams
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